Page 36 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes prime example is the Income Recognition and Asset Classification (IRAC) norms prescribed

by the Reserve Bank of India for provisioning for non-performing assets applicable to
banks.

Thus, if any asset is non-performing, based on certain prescribed criteria, a provision is
created for the potential loan loss irrespective of the security available with the bank.
Subjectivity Issue

Principle-based accounting has its own issues too. Ian Wright, Director of Corporate
Reporting at the Financial Reporting Council of UK, writing in accountancy magazine
(October 2008), talks about the subjectivity that is present in the IFRS.
The IFRS is full of words and phrases that are open to interpretation. The accompanying
table has a selection of the probabilities in IFRS literature that a user is expected to interpret
in the context of understanding what an accounting standard requires.

Ian Wright also identifies other issues that are potentially problematic.
The IFRS literature contains an increasing range of technical terms which don’t translate
well into languages other than English. Also, the standards were written in different eras
and sometimes by individual national standard-setters due to which the usage of the
English language differs resulting in them being structured in disparate ways.
One can therefore see the potential hazards in interpreting a principle-based accounting
standard that contains highly subjective phraseology.
In this context, one can expect problems of interpretation in India also. For instance, the
word “shall” (a key word in accounting standards) is used in a manner that is completely
different from its usage in countries where English is the mother tongue. Any user of IFRS
would therefore need to be alive to these issues when interpreting IFRS.

Hint: The preparation of financial statements in accordance with the GAAP in a rule-based
environment.
Source: www.thehindubusinessline.com

3.3 Summary

z Accounting is the process of recording, classifying, summarizing in a significant manner of

transactions which are in financial character and finally results are interpreted.

z The revenues are recognized only at the moment of realization but the expenses are
recognized at the moment of payment.
z The charges which were paid only are taken into consideration but the outstanding, not yet
paid is not considered.
z The revenues are recognized only at the time of occurrence and expenses are recognized
only at the moment of incurring.

z The financial statements are found to be more useful to many people immediately after

presentation only in order to study the financial status of the enterprise in the angle of their
own objectives.
z The entire accounting system is governed by the practice of accountancy.
z The accountancy is being practiced through the universal principles which are wholly led
by the concepts and conventions.

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